Do Downpayment Assistance Programs Impact Appraisals?

Everybody is talking, rightfully so, about the big bailout agreement. It’s Main Street vs. Wall Street as some have stated polls showing 80 percent of the public is not in favor of the bailout. If you’re looking for a different debate look no further. Thanks to the Housing and Economic Recovery Act of 2008, FHA will no longer be accepting seller funded downpayment assistance programs. These are programs where a seller pays the downpayment for the buyer utilizing a nonprofit pass through. Everybody is a winner – the buyer gets the house with little or no real financial investment, the seller gets the house sold, the nonprofit reaps a nice administrative fee for making it all work.

It almost sounds to good to be true. And as the saying goes – it is to good to be true. The dirty little secret of these programs is that the homebuyer typically pays more for a house using these programs than those who buy similar houses and don’t use these programs. The seller tends to be a developer looking to sell their homes. This is bad because the end result is often increases in foreclosures. Foreclosures mean people lose their homes and loan funds (probably some mortgage backed securities) are at greater risk of failure. Further, these programs tend to be offered to those who can least afford any other option for purchasing a home (which might make some wonder if these buyers should be owners before they’re ready). The Government Accountability Office, IRS, and HUD Inspector General have all reported on the problems with these programs.

As we were mulling over this program one question that comes into mind is how this impacts appraisals. Assume house A and house B are fundamentally the same and would appraise at the same value. Buyer X has a 10 percent downpayment and purchases house A for $100,000. Buyer Y does not have a downpayment but purchases house B for $115,000 how does the appraisal work? Do appraisers find out in advance that a downpayment is coming from Nehemiah or AmeriDream. Even if they do, this wouldn’t increase the value of the house – just the size of the loan. Please let us know how this impacts you – if at all.